PROPERTY OWNERSHIP

Buying a Property in Portugal

OVERVIEW

With effect from 1st January 2004, the foreign owners of Portuguese property
have been forced to review the ownership structures of their property, from the
traditional offshore company route, to a route involving either the transfer or
re-domiciliation of the current holding entity to a jurisdiction that has not
been indicated in the Portuguese property corporate owners black list, which
includes almost all offshore jurisdictions.

The initial legislation introduces large tax increases for property owned in
offshore jurisdictions appearing on the Portuguese blacklist. The blacklist
includes Gibraltar, Isle of Man and British Virgin Islands.

The rate of Municipal Tax for property held offshore is now 5 per cent in
addition to the introduction of an 8 per cent property transfer tax (the initial
legislation in 2004 set this rate at 15%, but this was reduced to 8% in 2006).
Properties owned by individuals will not be affected.

On first reading the proposals appeared to make offshore property holding an
unattractive choice. So what should potential and existing property owners be
doing and why is corporate ownership of high value property such a popular
option?

The main issue is that despite the imposed tax reforms there are still good
reasons for owning high value Portuguese property through a corporate structure.

Corporate ownership can eliminate capital gains tax if the property is resold
through the transfer of shares in the owning company. This leaves the title to
the property unaltered, thereby avoiding a tax liability occurring in the
country where the property is situated.

The transfer of shares also means that the prospective buyer can avoid paying
legal fees, notarial fees and transfer taxes in the place where the property is
situated. Additionally, it bypasses the lengthy and protracted procedures that
are necessary to register new title deeds enabling the sale and purchase to be
carried out quickly and cheaply.

The purchaser of the shares, however, would be foolish not to have a
corporate lawyer prepare a proper contract for the sale/purchase of the shares.
The lawyer should also check that the company does own the unencumbered title to
the property.

On resale the property would be subject to Imposto Municipal sobre
Transmissoes (IMT) and Imposto Municipal sobre Imoveis (IMI).

On properties worth €500,000 and over IMT will be charged at maximum 6 per
cent. IMI will be between 0.2 and 0.8 per cent, depending on the tax valuation
of the property and its age. This could cost up to €34,000.

If the sale of such a property were to yield a profit of €130,000 -
Portuguese capital gains tax chargeable at a flat rate of 25 per cent for
non-residents, would amount to approximately €32,000.

Add to this registration and legal fees and the total bill could come to well
over €80,000 - costs that could have been avoided by using a corporate
structure.

The proposals to introduce punitive taxes appear to make offshore property
holding structures a less favourable option but the good news is that the
advantages are still available.

The key is to find a corporate structure offering the benefits of offshore
ownership without the new tax liability. This means incorporating in a
non-blacklisted territory with a favourable tax regime.

For potential property owners this is a great option. But what about those
who already own Portuguese property through a blacklisted offshore jurisdiction?

For most, transferring the property back into their own names will not be an
option as it could result in high capital gains liabilities and transfer taxes.

Therefore there are two possible routes that have been favoured since the
change in the law, the re-domiciliation of the corporate entities to either
Malta or Delaware, neither of which are on the Portuguese black list of
companies for property holding.

For new projects, where the property is to be acquired from a local company,
a popular alternative is to have the ownership registered in the name of either
a UK or Irish resident company acting as a bare trustee for an on behalf of
either an offshore company or offshore trust / foundation. Thus, when the time
comes that the property is to be sold, the shares of the company can be
transferred to reflect the change of ownership and not actually a change in
title on the registry. This is similar to what occurred during the days of
offshore company ownership.

A bespoke 'offshore' solution can be complex and
requires careful planning and execution. We therefore
encourage our clients to contact us directly, without
obligation.

While all of our consultants in our offices provide a Free Initial
Consultation, the office and consultant listed below has particular
expertise in this area and will gladly assist with advice on how to approach
your unique challenge.

Disclaimer: Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or otherprofessional advice. OCRA Worldwide does not accept any responsibility, legal or otherwise, for any errors or omission.